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Inching Forward in India
After a breadmaker, the airlines may be next
By Dan Woodley and Sanjay Kapoor Delhi

Circumspect is hardly a word that comes to mind when one considers Virgin Group boss Richard Branson. The brash British mogul, majority owner of Virgin Atlantic Airways, has been gobbling up transatlantic and transpacific routes faster than his glossy jets can fly. Most recently, he spoke of plans to bid for a sizeable stake in soon-to-be-privatized Air India. That sparked renewed debate in the country over the future of debt-saddled "public sector undertakings."

These state firms have suffered serious, steady decline since the heady days of socialism. More than 240 mostly loss-making enterprises producing everything from bread to pharmaceuticals, have, economists estimate, bled India to the tune of $45 billion. Aviation made for a perfect example of calcified state businesses. For years international carrier Air India and its domestic counterpart Indian Airlines plodded along in a hermetically sealed environment where profit was often forgone for political interests.

Powerful unions have made it virtually impossible to sack airline staff. Plans for even the most trivial rationalizations have been ritually rebuffed by nationalist heavyweights in Delhi. "Privatization programs are a fraud," says leftist leader Atul Kumar Anjan. "The government wants to sell assets cheaply to cronies and multinationals."

As a result, indigent Air India has the highest man-to-machine ratio in the aviation world, its ballooning payroll serving as a major impediment to growth. Its 17,600 employees service just 23 planes. Its debts amount to more than $550 million. With every canceled flight or complaint, the momentum for at least a partial sell-off to private interests grows.

Indian Airlines, too, faces formidable pressure to privatize. The latest turn of the screw: the July 17 crash in Patna of a Boeing 737 operated by Alliance Air, a subsidiary of Indian Airlines that flies mostly aging aircraft. Many Alliance pilots have raised concerns about old aircraft. The Patna accident has given credence to their worries. Boeing has argued that "age generally is not related to mishaps," but in the eyes of the public, body bags generally trump manufacturer's expertise.

That tragic incident, in which 57 people died, has left Civil Aviation Minister Sharad Yadav, an old-guard socialist, powerless to douse the flames of reform gathering strength in New Delhi. Come September, Air India, along with a host of other slumping state companies, will come under the auctioneer's gavel. The government has reluctantly allowed for 60% of the airline to be sold, including 26% to foreign buyers.

While divestment programs have been in place since 1991, implementation has been slow. In particular, wresting control from bureaucrat bosses has gone nowhere; nor have retrenchment efforts despite "golden handshakes" offered to employees of loss-plagued firms. But this year Prime Minister Atal Bihari Vajpayee's government finally recognized the necessity for real reform. That means selling majority ownership and handing over management control to the private sector.

"There is a consensus over reforms," says former disinvestment minister Arun Jaitley. (He was replaced on July 24 by economist and ex-journalist Arun Shourie, tasked with persuading the nationalists.) Among the first real divestments has been breadmaker Modern Food Industries. As recommended by the four-year-old Disinvestment Commission, New Delhi sold 74% — the first outright privatization sale — to the local unit of Britain's Unilever. This year the Cabinet Committee on Disinvestment plans to dispose of 11 more firms and take a hard look at another 33.

Vajpayee says he plans to spend privatization proceeds on modernizing India's primitive infrastructure. (The World Bank has just warned that the economy could falter if facilities are not upgraded.) But Vajpayee's laudable objective won't do much to moderate the sharpest attacks against privatization emanating from the Hindu rightist umbrella organization Rashtriya Swayamsevak Sangh, the political arm of which is Vajpayee's own ruling Bharatiya Janata Party.

The RSS and its equally hard-line affiliate, Swadeshi Jagran Manch (forum for the promotion of self-reliance), have publicly lambasted the PM's reform program as "anti-people" and "anti-national interest." Supported by domestic business interests, the two groups also allege lack of transparency and the misvaluation of state firms.

Even stronger opposition is coming from cabinet ministers who control the state companies. But such assaults don't seem to have fazed key pro-reform ministers, some of whom are RSS members able to rein in the anti-reform group somewhat. That Civil Aviation Minister Sharad agreed to privatization underscores the greater clout of reformists. He still insists: "Control of Air India will be with the government." Now, happily, such statements may no longer fly.

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